Noble Corporation plc

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Noble Corporation plc is a leading offshore drilling contractor for the oil and gas industry, providing a range of services and equipment for oil and gas extraction and well construction globally.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Noble Corporation (NE) is a company operating in a highly cyclical industry, and therefore, moat analysis needs to take into account the potential of a company to produce sustained returns throughout different points in the economic cycle. As such, understanding the company’s resilience during downturns is very important.

Business Overview:

Noble Corporation (NE) is a provider of offshore drilling services, primarily operating in the oil and gas sector. As of Dec 31, 2023, the company’s fleet consisted of 22 rigs, including 12 drillships and 10 jackups. Their operations are primarily focused on ultra-deepwater and harsh-environment regions. NE operates on a global scale, with a presence in areas like South America, the North Sea, the Middle East, and Africa.

Notably, Noble has been expanding its presence in the offshore drilling market following the recent merger with Diamond Offshore and acquisitions in Guyana and other parts of the world. This growth has been aimed at broadening its geographic reach and capabilities.

Revenue Distribution:

NE’s revenue is primarily generated through contracts with oil and gas companies for drilling services. The company operates in three key segments: 1. Floaters: This segment is primarily responsible for the drilling of offshore deepwater wells. It constitutes the majority of revenue and operations. 2. Jackups: This segment involves shallower water drilling and generally has shorter duration contracts. 3. Other and Reimbursables: This segment refers to activities such as reimbursable operations.

Revenue for Noble is tied directly to fluctuations in demand and pricing for drilling contracts, which are in turn highly correlated with oil and gas prices.

Industry Trends: * The offshore drilling industry has seen a recovery from the recent slump in oil and gas prices. * Increased oil prices have driven up demand for drilling services. * The industry is impacted by geopolitical events, as demand changes based on international policy. * There is an ongoing global trend toward energy transition and efforts to develop renewable energy sources, which have been counter-weighted by current high-energy prices.

Competitive Landscape: * The offshore drilling industry is highly competitive with few major players. * Companies compete on factors such as the age and capability of their rigs, service quality, safety records, and prices. * There is increasing consolidation among the players in the industry.

What Makes Noble Different: * NE focuses its operations on technologically advanced rigs designed for complex environments. * The company has also been working towards achieving sustainability goals, including a reduction in emissions. * They have a wide geographical reach.

Financials in Depth:

Noble’s financial performance is tightly coupled with oil and gas price fluctuations, as prices directly affect the demand for drilling services and hence the rates that can be charged for drilling contracts. Here is a discussion on the latest financials for Noble:

Revenue Trends:
Total revenues for Q1 2024 was $692 million, an increase over both previous quarters and the year-ago quarter.
- While the floaters segment has a higher revenue ($438 million), jackups segment has seen a larger increase over previous year (nearly 50%).
Their revenues are expected to increase to $2.1 billion in 2024 and $2.6 billion in 2025.

These increases in revenue can be partially attributed to the recent integration of Maersk Drilling, and increases in demand, which shows the ability of the management to utilize current industry conditions for higher profitability.

Operating Profit and Margins:
- A significant profit has been made at operating level, jumping to $481 million (32.9%) in Q1 2024 compared to $153 million (13.6%) in Q1 2023.
- EBIT rose to $336 million in Q1 2024, up from $63 million year ago.
- Their operating margins are showing some volatility with the range being between $425 million to $600 million in operating income for the full year 2024.

While margins are looking healthy now, it should be noted that margins in this industry are highly volatile and can be affected by multiple external factors. Therefore, consistency is hard to predict.

Net Income:
- Q1 2024 net income was $330 million, a substantial rise compared to year-ago quarter of $151 million. The Q1 2024 EPS was $2.04 and diluted EPS was $2.00.
  - Their EPS is expected to come to $6.19 in 2024 and $7.17 in 2025.
- They had a net loss of $899 million for the year 2023, largely due to a loss on extinguishment of debt of 1.2 billion and impairment costs of their rigs.

The large swing in the company’s net income from one period to another can lead to unreliable profit forecasts, since one-off situations can significantly impact results.

Cash Flows:
Q1 2024 operating cash flow was $292 million and free cash flow was $239 million.
- Cash flow was used to partially fund the acquisition of new rigs.
- They expect to have full year free cash flow of $844-$895 million.

Strong cash flow allows the company to invest in growth opportunities and new technologies as well as service its debt obligations.

Capital Structure:
- NE has made a significant reduction in debt in the past few years, by redeeming billions of dollars of debt and using the excess cash they generate to pay it down and deleverage.
  - The company has a current total debt of ~$3.6 Billion and a debt-to-capitalization ratio of 39.1%.
  - They have a good maturity profile with maturities spread across the next several years, which reduces risk.

Given the volatile industry they are in, a reduction in debt makes them less vulnerable to volatile economic conditions.

Moat Analysis:

Noble Corporation has several attributes that provide a competitive edge. It must be taken into consideration the industry they are operating in is a cyclical one, so moats in this business will always be limited. The company has a limited moat, with the rating of a 2/5.

Economies of scale: They operate a large fleet of offshore drilling units and also are involved in operations and drilling in many regions across the globe. This helps them manage costs more efficiently. * High switching costs: Clients who have a positive experience with Noble will be reluctant to switch to other providers. The high upfront costs of switching drilling contractors, and the disruption caused by it, act as switching costs. * Intangible Assets: The company’s brand, a by-product of their history in the oil industry and history of success, also provides a small competitive advantage.

Risks to the Moat and Business Resilience:

The primary threats to the company’s moat and its business include:

Industry Cyclicality: The demand for drilling services is directly tied to the price of oil and gas, making companies in the drilling industry extremely susceptible to commodity cycles.
Intense Competition: They operate in a highly competitive sector. Companies are constantly trying to gain market share, which creates volatility.
Technological Change: New technological breakthroughs by other competitors could erode Noble’s advantage. * Political and Regulatory Risks: They are affected by the instability in different regions around the world, as well as their regulatory policies. The conflict in Ukraine, as well as other political uncertainties, has increased energy costs.
Reliance on Key Customers: A few key customers account for significant part of their revenues. A loss of business from key clients could hurt their performance.

Business Resilience: * Their focus is on long-term contracts that secure profits for long periods of time. * Their diversified portfolio of clients across a wide range of regions. * They have reduced their debt profile. * They keep optimizing their operations to control costs and improve profitability.

Based on this, their business has a decent level of resiliency to survive any economic downturns.

Understandability Rating:

This business gets a 3/5 understandability rating, meaning it’s moderately complex. While the core idea of offshore drilling is straightforward, analyzing the financial statements of these companies and predicting their revenues and profits given they operate in an extremely volatile market, is difficult for an average investor. Other factors that increase its complexity are the number of geographical locations they are operating in, along with different types of contracts they provide.

Balance Sheet Health Rating:

The balance sheet health is a 4/5. While they have substantial debt, management is currently working towards deleveraging by paying down debt and increasing their cash reserves. Furthermore, they have a good debt maturity profile with debt maturities spread over the coming years.

Recent Controversies:

The company has been involved in ongoing litigation over tax policies, and their outcome is not fully known yet.
The company has had to reduce its rig utilization projections due to labor and logistics problems. This has prompted a downward revision in their guidance.

These events show that the company has significant risk factors that can reduce its profitability and hurt shareholder returns. Management has acknowledged these problems, and the company has taken actions to avoid negative financial outcomes in the future.